We need consumers to get comfortable again

The good news for Australia’s national savings is that households have done their bit, they’re saving at a rate of knots. The bad news is for retailers, as many consumers finally have been forced to stop spending on credit to maintain their lifestyle.

But for all the woes investors have heard about the consumer discretionary sector, it hasn’t done that badly this year. The sector is up 13 per cent year to date, which matches the13 per cent gain in the broader S&P/ASX 200 Index.

It trades with a 4.8 per cent dividend yield and on a forward price-earnings ratio (P/E) of just over 14 times, according to Bloomberg, above the 12.5 times forward earnings multiple for the broader market.

And some stocks have done very well as the graph shows.

But it’s the media stocks that have grabbed the headlines with their poor performance and that has tainted the sector overall.

Consumer spending accounts for about 60 per cent of the economy and so the ability of Australians to tweak their debt levels and savings has huge consequences for discretionary spending.

Companies such as Harvey Norman are highly leveraged to spending on non-essential products such as consumer electronics.

Billabong, on a forward P/E of 13.3 times, David Jones, at 10.9 times, and Myer, on 9.8 times, are also finding conditions tough due to the rapid growth in online spending and a strong currency.

And those factors aren’t about to change anytime soon, if at all.

The Australian dollar – despite the tip that the Reserve Bank of Australia will cut official interest rates in the next 12 months – is poised to keep rising.

This week the US Federal Reserve again made it clear it was going to keep monetary policy very loose, and that devalues the $US and gives investors more reasons to buy the $A.

The growth of online retailing will also keep rising and the internet is certainly the future. But it doesn’t get the retailers out of the mess they are in right now.

According to National Australia Bank, online retail sales in this country climbed to $12.3 billion in the year ended October 2012. But the share of total spending, at about 5.6 per cent, is still quite modest.

However, the rate of growth in online sales has risen substantially in the past six months.

There was a slowdown in the early stages of this year but the latest statistics show growth of about 26 per cent year on year in October, compared with 2.2 per cent growth for traditional retailing in September.

The latest consumer sentiment numbers also throw up some interesting considerations when it comes to how consumers are thinking in an environment where saving and paying down debt is seen as the right thing to do.

On Wednesday, the Westpac/ Melbourne Institute Index of Consumer Sentiment for December fell 4.1 per cent to 100 points.

A reading of 100 indicates equal numbers of pessimists and optimists among respondents.

The fall in sentiment came despite the RBA cutting the official cash rate to 3 per cent. It’s reasonable to expect that the index would respond quite positively to the rate cut.

Indeed, the previous index released after the RBA kept rates steady at 3.25 per cent in November showed a rise in sentiment.

The index back then rose above 100 for the first time since February and reached its highest level since April 2011.

Maybe consumers feel more comfortable when the RBA doesn’t have to cut rates but when it does, there is a feeling that all is not well with the world and it gives them a reason to stay cautious.

This probably talks to one of the two factors that drives all financial behaviour – fear. The other one is greed.

Fear is still dominating, which is why government bonds and high-yielding stocks with a decent dividend are so appealing to many investors right now.

The other issue is that savers are disappointed when their deposit rates are cut after a drop in the RBA cash rate.

There are some signs that show people are starting to look at property investments again and one of the big themes for 2013 will be when savers make the big switch from bank term deposits and into more risky assets to get higher returns.

According to CommSec, consumers have taken out record loans to buy new or used cars. And for all the worries, the sharemarket has risen to it highest level in almost a year and a half.

At some point in the market psyche ,the pullback in consumer spending will wane but maybe a cloud will hang over the sector until it does comes back.

In 2013 there will also be a federal election. Like it or not, elections do cause consumers, businesses and investors to stay on the sidelines until they know exactly what is going to happen.

Retailers and builders in particular are vulnerable to any election-driven strike by consumers and businesses. But once Canberra has sorted itself out, it might breathe some much- needed confidence into the sector.